The recent judgment of the Competition Commission of India (CCI) against the predatory pricing strategy followed by the National Stock Exchange (NSE) in the currency derivatives (CD) segment is a landmark verdict in the history of Indian financial market. CCI, by levying a penalty on NSE, has sent the right message that malpractices will not be tolerated, even if they are followed by dominant players. Such a step will go a long way in boosting investor confidence.

Unfortunately, a few have now started questioning in the press the ?quality? of CCI?s judgment and have tried to justify NSE?s market-destroying policies on grounds that are neither backed by economic theory nor are based on facts.

They argue that NSE?s zero transaction charge policy in the CD market does not imply predatory pricing. Setting zero charges for more than three years of the introduction of the product and despite the business in this product exceeding that of the cash market segment in which NSE levies quite sizeable charges, offers adequate evidence of NSE?s ?intent to interfere with other?s ability to compete and drive them out? of the CD market. This is being done knowing very well that the competing exchanges will not be able to cross-subsidise the loss arising out of zero charges, which NSE can do due to its monopoly position in other segments such as spot market and equity derivatives. So, the intention to kill the competition is abundantly clear. NSE followed a similar predatory pricing policy in the equity derivative market in the early years of 2000, destroyed competition, became a dominant player and continues to reap monopoly profit thereafter. Given the history, there is enough evidence of NSE?s intention to kill competition and reap monopoly profits in the CD segment as soon as other competing exchanges are wiped out from this market.

Another misplaced argument supporting NSE?s predatory pricing policy is that a stock exchange is a network business and zero charge policy results in increased participation, which is likely to be recovered from economies of scale. It may be noted that today virtually every industry is a networked industry, leave alone stock exchanges. Telecom, financial services and information technology are industries where network effects are more prominent. Even in the case of traditional manufacturing industries, it is the network that competes with other networks, in the era of e-supply chain management systems. Thus, the network argument is misplaced in this context. Competition driving down the prices is welcome but there should not be any space for an institution not charging at all for a product/service on the strength of the financial position derived from monopoly profits from other segments, and depriving the competitors of their only source of income. NSE has been precisely doing this.

Critics of the CCI judgment quote the case of NYSE?s 100% rebate on trade reporting facility (TRF) market data, in 2008. Subsequently, TRF rebate was also increased by other exchanges such as NASDAQ and FINRA, which jointly owned a TRF. Hence, they argue that zero charge policy is not uncommon in global financial markets. This case is quoted out of context. First, NYSE, NASDAQ and FINRA have followed together in this move, though it might have been initiated by NYSE. Second, it was only a reduction in the charges of an ancillary source of revenue and was not a case of total withdrawal of the main stream of revenue. Third, TRF is not an exchange-traded product; it is a post-trade service that does not usually constitute a major source of revenue for exchanges. Moreover, FINRA, as a self-regulatory authority, did not object to it since the major exchanges were okay with the price decrease. We are not sure whether critics know that NSX and not NYSE is the exchange that was the first to create, in 1998, a market data sharing platform, which saved the American securities industry $100 million. NSX itself is a low cost provider of services in the American securities market. Comparing this case with NSE?s predatory pricing in the CD market, where zero prices levied by one monopoly exchange are causing a severe drain on the resources of other competitors, is completely out of place. It may be pointed out that recently the Swedish Competition Authority conducted raids on the country?s dominant stock exchange operator NASDAQ OMX, owned by the US-based NASDAQ group, as part of its probe into alleged anti-competition practices adopted by the bourse. It is investigating whether NASDAQ OMX applied any pressure on Verizon to deny data centre space to its rival exchange Burgundy, a charge that is far less serious than the one of predatory pricing against NSE.

Those who, ironically, justify NSE?s predatory pricing as a market development activity forget that it is in the long-term interest of consumers that competition grows and thrives in the market. Competition alone shall drive down costs, encourage innovations, improve services and protect the interest of consumers. What is even more worrying is that these critics have now started questioning the quality of CCI?s judgment, making the argument that it was a majority and not a unanimous decision. This is taking the debate to lower levels and will damage the credibility of regulatory institutions in the minds of investors. The penalties imposed by CCI on NSE are quite justified and should be enforced to send the right signal among the market players that market-destroying behaviour is not acceptable. Such measures will encourage greater market participation, which is the need of the hour. Further, to ensure retributive justice, NSE should not be allowed to operate in the CD segment for the next three years, the period for which it has waived off transaction charges and hence damaged competition.

The authors are professors, department of financial studies, University of Delhi